The federal estate tax exemption is set to decrease to $5 million. (Unsplash)
A federal estate tax applies to the assets owned by an individual at the time of their death, including cash, properties, real estate, business interests, and insurance policies. The estate is responsible for paying the federal estate tax before the remaining assets are distributed to the heirs. This differs from inheritance tax, which some states impose on the recipients of the assets.
Exemption Amount
Currently, the exemption level is high due to the Tax Cuts and Jobs Act (TCJA) enacted in 2017. For 2025, an individual can exempt $13.99 million, while married couples can exempt $27.98 million. However, if Congress does not enact new legislation, this exemption will decline to $5 million by 2026. Although $5 million might seem substantial, it can be quickly exceeded in regions with high property values. Given that estate tax rates could approach 40%, this reduction may have a significant effect on one’s estate. For instance, if your estate is valued at $7 million, $5 million would be exempt, leaving $2 million potentially subject to a 40% tax rate. This scenario would result in your estate owing $800,000 in federal estate tax.
Strategies to Minimize Estate Tax
There are several strategies to minimize your estate value and potentially avoid federal estate taxes:
• Reviewing beneficiary designations: Ensure your bank accounts and insurance policies have designated beneficiaries to keep these assets out of your estate.
• Making charitable gifts: In 2025, you can give up to $19,000 to an individual each year without needing to file a gift tax return. For married couples, this limit is $38,000.
• Donating to charity: Contributions to charitable organizations can significantly reduce the value of your estate.
• Establishing trusts: Creating trusts can help remove assets from your estate. A revocable trust allows you to manage the assets during your life and make adjustments as needed, ensuring those assets are not included in your estate after your death. An irrevocable trust, like a life insurance trust or a Charitable Lead Trust, permanently removes assets from your estate.
It’s critical to stay updated on changes to the federal estate tax exemption and consult with a qualified estate planning attorney. Congress may alter the regulations before the current exemption period concludes.
